Ukrainian billionaire takes on BHP

Gennadiy Bogolyubov grew up expecting to be a Soviet Union construction engineer and instead found himself as a globe-trotting billionaire, who now controls much of the world’s $35 billion trade in manganese.

Bogolyubov, 48, is the biggest individual investor in manganese – a key component in steel making – after the industry’s dominant player and price setter,
BHP Billiton
.

Now, in an exclusive interview with The Australian Financial Review, he explains how he is taking on the Big Australian by buying up manganese miners on its home turf.

The Ukrainian-born Bogolyubov is in discussions to secure the manganese assets of
OM Holdings
and, if successful, it would strengthen his Australian manganese portfolio, which already includes Consolidated Minerals.

It has long been speculated that the businessman’s endgame with his Australian acquisitions is to corner the manganese market. He also has manganese mines in South Africa, Ghana and the Ukraine.

But Bogolyubov tells the AFR that his path to becoming a mining magnate was by accident rather than design. “It was not my goal to become a manganese player," he says.

“It was by situation. We started our business with the independence of the Ukraine. It was 1990, and step by step from one business to another we became one of the biggest players in the manganese business."

Bogolyubov’s right-hand man, Oleg Sheiko, a former investment banker who once worked for now-defunct Russian oil firm Yukos, is more blunt about his boss’s strategy.

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“We think we can take significant influence over world production of manganese ore and that is what we are interested in at the moment," he says.

“The outlook for manganese prices this year and the medium term are positive and we are very happy at the moment that we are in manganese."

The spot price of manganese, which is now set by monthly negotiations between BHP and Chinese buyers, is hovering around $US8 a dry tonne unit, well shy of the $US18 peak it hit before the global financial crisis.

Bogolyubov made his debut in Australia in 2007 when his private firm, Palmary Enterprises (palmary means excellence) aggressively muscled its way into a bidding war for Perth-based Consolidated Minerals.

The three-way contest for ConsMin ended with Bogolyubov slamming down a knock-out bid of $1.36 billion for the miner, double the opening offer for the firm.

Bogolyubov lives in London and counts among his colleagues and friends Roman Abramovich, the owner of top-ranking English Premier League football team Chelsea and also Russia’s third-richest man.

Bogolyubov is a director of Ambramovich’s Russian steel firm, Evraz.

Bogolyubov hasn’t had an easy time in Australia. He was caught off-guard when investment bank JPMorgan launched a legal action in 2008 to claw back the eyebrow-raising $50.8 million in fees it claimed it was owed for its work in advising ConsMin, when it was the subject of the takeover fight.

The case went before the NSW Supreme Court, which this year ruled that the $20 million in fees that Bogolyubov had paid JPMorgan was enough and any more would be “capricious, unreasonable and unjust".

JPMorgan is appealing against the decision, which has surprised Bogolyubov.

“It’s almost never that a big and respected financial institution goes to court against its clients," he says. “It’s a very big hit to their position and reputation. I’m one of the main shareholders in one of the biggest Ukrainian banks and JPMorgan is one of the biggest correspondent banks and lead managers of many, many operations of Privat Bank."

Bogolyubov, who has been dubbed Mr Manganese, was born in Dniprodzerzhynsk, a small industrial town in the south-east of the Ukraine, which borders Russia. Dniprodzerzhynsk was also the birthplace of Leonid Brezhnev, the second-longest-serving president of the Soviet Union.

Bogolyubov grew up in a Jewish family speaking Russian, which remains his native tongue, and recalls his childhood as a starkly different one compared with his sybaritic lifestyle today.

“I remember the country when there was not enough electricity to provide the light in the apartment," says Bogolyubov.

“My family had a very simple life. It was a very poor environment like everyone else. It’s not like I thought I would grow up and become a successful businessman. I did not even know the word businessman because capitalism did not exist in the Soviet Union."

Bogolyubov grew up feeling “Soviet" and even now has trouble with his identity.

“When the Ukraine became independent we had to decide who we are: Ukrainian or Russian. I wanted to be Ukrainian but Russian is my mother tongue. I think in Russian and I have to translate to Ukrainian."

The disintegration of the Soviet Union paved the way for the Ukraine’s independence in 1991 and it gave birth to Bogolyubov’s new career as a businessman.

He and a handful of other investors positioned themselves to benefit from the large post-communist privatisations and other opportunities that existed with the Ukraine’s embrace of capitalism.

“My partners and I were never part of the government," says Bogolyubov. “[Our business] was natural growth, nothing artificial. I don’t know of any particular deal that turned us from small to big."

Manganese is Bogolyubov’s only global business but he also has interests in oil, gas, chemicals, banking, food and construction. It’s a business empire that spans Africa, eastern Europe, Russia, the US, Ukraine and Georgia.

Most of Bogolyubov’s ventures have been done in partnership with fellow Ukrainian billionaire Igor Kolomoysky. Together they founded Privat Bank with $US1 million two decades ago, and it’s now one of the Ukraine’s biggest financial institutions.

Forbes magazine has estimated Bogolyubov’s wealth at just over $US1 billion ($1.1 billion) but this would seem to be very conservative.

Manganese’s allure to investors such as BHP and Bogolyubov is that it’s a ticket to ride on the steel-driven resources boom. Nine out of every 10 tonnes of manganese ore that is mined goes into the making of steel.

And the steel industry has been recovering since the global financial crisis, particularly in China, which last year produced half of the world’s steel output.

The demand for steel in China was bolstered by the Chinese government’s 4 trillion yuan ($639 billion) stimulus package announced amid the global financial crisis, which drove spending on new railways, subways and airports.

Continued Chinese investment in urban real estate and also the industrialisation of India has further fuelled steel demand.

The manganese market is controlled by a handful of producers such as BHP, Assmang, Eramet, Vale and Bogolyubov, while the rest lies in the hands of hundreds of disparate producers in China and India.

China has enormous reserves of manganese to feed into its steel industry but most of its ore is low grade.

China, which consumes half of the world’s manganese production, still has to import significant amounts of higher-grade ore to blend with its domestic material for steel production. The Ukraine is the world’s second-largest manganese consumer after China.

China continues to use more manganese than it can produce internally, says former BHP chief executive
Brian Gilbertson
.

Gilbertson’s Pallinghurst Resources has manganese investments in South Africa. He has competed against Bogolyubov on several acquisitions globally, including ConsMin, Ghana Manganese and OM Holdings. On almost every one he has been outmanoeuvred by the deep-pocketed Ukrainian.

Gilbertson would not comment on his rival when contacted by the AFR at his London office, remarking: “I have nothing to say that can be printed."

Peter Toth
, chief executive of OM Holdings and another former BHP executive, is more expansive. “Gennadiy is a very smart individual and an incredibly astute businessman. He’s very clever in both identifying opportunities and executing. I have a lot of respect for him, personally as well as professionally."

Toth says it is early days in negotiations with Bogolyubov on a deal that could combine the ConsMin and OM Holdings manganese operations. He denied any deal would be a reverse takeover of his firm.

“We believe there could be some significant operating and marketing synergies between the two operations," says Toth.

“From a strategic point of view we see industry consolidation as a positive. We have a very ambitious strategy and from that perspective these developments shouldn’t surprise too many people."

OM Holdings’ plum asset is the Bootu Creek mine in Australia’s Northern Territory, which produces about 5 per cent of the world’s manganese. ConsMin’s flagship asset is its Woodie Woodie operation in Western Australia’s Pilbara, which produces 10 per cent of the world’s high-grade manganese.

It has been speculated that OM Holdings, which has previously rejected overtures from Bogolyubov, could pay scrip for ConsMin’s Woodie Woodie mine, which would hand control of the company to Bogolyubov.

He already owns just under 12 per cent of OM Holdings.

Marketing and operational synergies between OM Holdings and Bogolyubov’s assets exist not only in Australia but also Africa, where both companies have mines.

“With or without the OM Holdings business we feel quite comfortable," says Bogolyubov. “Since the Consolidated Minerals acquisition, production has been growing. We don’t want to stop growing."

ConsMin, which may look at a debt raising later this year, has an exploration budget of $40 million and has been exploring for manganese deposits in and outside its Woodie Woodie corridor.

The firm’s total production this year is expected to reach 1.2 million tonnes, generating revenues of almost $500 million.

“I never thought to be in the position of No. 1, No. 2 or No. 3 in manganese," says Bogolyubov. “My target is to get the most efficient operation and efficient company."

If he pulls off a deal with OM Holdings, he’ll be on track to hit his target.